LOCAL GOVERNMENT 101

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A Local Official’s Guide to Pension Terminology www.ca-ilg.org/PensionGlossary v.5.1: 9/28/11 About This Guide As local officials engage in conversations with their constituents, their bargaining representatives and each other about public pension issues, it can be helpful to have a working understanding of what key terms and concepts mean. The Institute for Local Government has prepared this plain-language glossary to assist local officials with these conversations and to offer a level of transparency to the pension process. The glossary covers concepts relating to pension plan benefits, funding and governance. The terminology is inter-related in many ways. When a definition uses a word or phrase that itself is defined in the guide, the word or phrase will be listed in italics. Cross references to related terms are also listed at the end of definitions as “related concepts.” The Institute for Local Government welcomes your thoughts and suggestions on this resource. Please send them to jspeers@ca-ilg.org (or fax them to 916.444.7535).

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Thank Yous The Institute wants to express its appreciation to the State Association of County Retirement Systems and the California Public Employee Retirement System for their respective glossaries,1 which served as useful starting places for this glossary. They also are especially helpful resources for those who participate in those pension systems and/or are interested in understanding the range of options under those systems. They also each contain additional technical terminology relating to actuarial calculations for those who wish to delve into more detail relating to pension funding. The Institute is very grateful to Institute Graduate Fellow, Shannon Bowley, whose research, writing and incorporation of peer review comments, enabled this glossary to exist. In addition, the Institute thanks the following individuals for their review and comments on drafts of this glossary.

• John Bartel, President, Bartel Associates • Ronald Bates, Ph.D., City Manager, Pico Rivera • Brenda Carlson, Chief Counsel for San Mateo County Employees Retirement

Association • Andrew Carter, Council Member, City of San Luis Obispo • Daniel Connolly, Assistant City Attorney, City of Hayward • Kathy Foster, Alameda County Employees’ Retirement System • Wynne Furth, Of Counsel, Burke, Williams & Sorensen, LLP • Jackie Gong, Susan Altman, Janice Killion, County of Napa • Rod Gould, City Manager, Santa Monica • Joshua M. Horowitz, Shareholder, Bartkiewicz, Kronick & Shanahan • Natasha Karl, Legislative Representative, League of California Cities • Eraina Ortega, Legislative Representative, Employee Relations, California State

Association of Counties • Owen Newcomer, Council Member, City of Whittier • Connie L. Petersen, Health and Social Services Policy and Financial Analyst, Solano

County • Sulema Peterson, State Association of County Retirement Systems • Christie Porter, San Bernardino County Employees’ Retirement System • Patrick Whitnell, General Counsel, League of California Cities

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By the Numbers A number of pension-related phrases draw their names from their legal roots—typically a section in the California Government Code, Internal Revenue Code or other law.

• 1937 Act Retirement System. State law (officially “The County Employees Retirement Law of 1937”) authorizes counties to create and operate pension systems for county and other local agency employees. Twenty California counties operate pension systems under the 1937 Act. Some local agencies also participate in these county-operated systems. Two other cities have pension systems created pursuant to their charters. Other counties and local agencies participate in the California Public Employees' Retirement System ("CalPERS"), which was formed under the Public Employees Retirement Law (“PERL”). These pension systems offer defined benefit pension plans.

• 401(h) Account. Section 401(h) of the Internal Revenue Code permits a pension plan to provide

for tax free payment of benefits for sickness, accident, hospitalization and medical expenses for retired employees, their spouses and dependents. Accordingly, the method for providing tax free medical benefits in a pension plan (or money purchase plan) is by using a section 401(h) account.

• 401(k) Plan. This is a common form of defined contribution plan. Under this type of plan,

employees contribute an amount of their base salary on a pre-tax basis to an account that will be invested for their eventual retirement. Employers may contribute matching funds if they choose.

• 457 Plan. This is a form of a defined contribution plan. Under this type of deferred compensation

plan employees choose to defer a portion of their pre-tax earnings into an investment account. Employees may change their contribution amount, transfer funds among a variety of investment options, or change contribution percentage allocations. Amounts contributed to the plan and the interest earned on these investments is not subject to income tax until the money is taken out during retirement or upon separation from the employer.

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Accounting Standards. See Governmental Accounting Standards Board (GASB). Active Member. Retirement systems, including CalPERS, CalSTRS, and 1937 Act systems, refer to those who are participating in the system’s pension plan as a “member” of the system.

• A “member” can be active, inactive, or retired; a survivor or beneficiary of an employee who is a pension plan participant is also considered a member.

• “Active” members are pension plan participants who are currently working for an

employer and are earning service credit in a retirement plan. Active members also include members on authorized leave who are not earning service credit.2

Related concepts: member, participant. Actuary. Retirement system boards hire these professionals, whose key responsibility is assessing whether a pension fund has sufficient assets to meet its financial obligations.3 They calculate pension plan obligations (often referred to as “liabilities”) and assets to then determine the contributions necessary to fund promised pension benefits. They do this by estimating the present (discounted) value of future pension benefit payments, using a variety of assumptions, including worker and retiree life expectancies, past and future earnings, and estimated pension fund investment results. An actuary makes these projections on a long-term basis through a combination of mathematics, statistical analysis and financial theory in an effort to understand the effect future events will have on the pension fund obligations and resources. While not an exact science, the actuarial analysis is an important component of assuring a financially healthy pension plan. Related Terms:

• Actuarial Assumptions. Actuaries make assumptions about certain events that will affect pension costs. Assumptions generally can be broken down into two categories:

o Demographic Assumptions. These include projections about such things as to when

people will die (life expectancy or mortality), become disabled, or will retire. o Economic Assumptions. These include projections about such things as what the

pension system will receive as a return on its investments, inflation, base salary growth and what level of benefits a pension plan member will receive.4

• Actuarial Accrued Liability. This number can be the result of actuary calculations that

assess whether a pension fund is on track to meet its financial commitments to participants. If there is a projected shortfall, the actuary concludes that the fund has a net liability. This concept is also sometimes referred to by its acronym “AAL.” Related terms: actuarial valuation, actuarial valuation report, expected future benefits, fully

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funded, funded ratio, funding policy, normal cost, present value of projected benefits, and under-funded..

• Actuarial Valuation. This is a procedure actuaries use to help pension funds establish the amount a plan needs to collect in order to meet the fund’s current and future payment obligations. One technique used is to estimate the current (present) value of the future benefits a pension plan should expect to pay. Once this number is calculated, then the contribution amounts necessary to cover those benefit costs can be computed. Unfunded costs are costs not currently covered by plan assets.5

• Actuarial Valuation Report. This report is an assessment of whether, given 1) current and projected levels of employee and employer contributions and 2) current and projected investment earnings, the pension fund will have enough money to pay amounts promised to pension beneficiaries. These reports are usually prepared annually in order to determine whether employer contribution rates need to be adjusted. The report uses past performance of plan assets to project contributions necessary to fund current estimated liabilities. A general goal is to fund the amounts necessary to pay employees’ estimated pension costs while the employees are working and earning pension benefits.

• Assumed Rate of Return. To fund promised pension benefits, employee/employer contributions are invested. The estimated return is the pension fund’s assumed rate of return or annual expected gain and one of the factors used by actuaries to estimate the cost of funding a defined benefit pension plan.6 Related concept: investment policies.

Additional Service Credit (“Air Time”). This is a practice used by some systems that allows employees to purchase additional retirement credit for time not actually worked. Related concept: service credit. Asset Allocation Plan. Pension systems typically invest pension assets in different kinds of investments (a concept known as diversification), based on a balancing of considerations including the relative risk of certain kinds of investments, how those investments relate to inflation, and what kind of returns those investments are likely to earn.7 Related concepts: duty of reasonable care and diligence, fiduciary duty, investment policy. Asset Smoothing. This is the practice of spreading a pension system’s investment gains and losses over a period of time in order to minimize year-to-year contribution rate fluctuations. This is done by assigning a market-related value to a plan’s assets in order to determine contribution requirements. This assigned value is called the actuarial value of assets (sometimes referred to by the acronym AVA) or the “smoothed value” of assets.8 Related concepts: employee/employer contribution, investment policy, and pension cost volatility.

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Base Salary. This is the fixed rate of compensation that an employee receives from an employer for a specified job. Base salary does not include employee benefits, bonuses or any other form of special compensation that may be part of an employee’s pensionable wages. Related concepts: benefit formulas, one-year final compensation, employer/employee contributions, and pensionable wages. Benefit Formula. Also known as a “pension benefit formula,” this calculation determines the amount a retiree receives in a defined benefit pension plan. This amount is typically based on a mathematical formula contained in statute that takes into account the following factors:

• The number of years of service the employee has in the retirement system (known as “service credit”);

• The employee’s pensionable wage level; • Age at time of retirement; and • A percentage factor.

For an example please see defined benefit pension plan. Related concepts: enhanced benefit formulas, one-year final compensation, pension systems, pension spiking and service credit.

Board of Retirement. For 1937 Act retirement systems, the administration and control of each county pension system is entrusted to a “board of retirement,” consisting of nine members.9 Four members are employees (two general, one safety plus an alternate, and one retired plus an alternate) each elected by their peers for three-year terms; four are appointed to three-year terms by the county’s board of supervisors; and one is the county treasurer. In Los Angeles County, this entity is known as the “Board of Retirement and a Board of Investment.”10 Related concepts: duty of care and diligence, fiduciary duty, plan governance, retirement system board, and third-party administrator.

California Public Employees’ Retirement System (CalPERS) (Formerly PERS). This is a pension system established by the Public Employees Retirement Law11 in 193212 for state employees. It was expanded in 1939 to include classified (non-teaching) school employees and employees in California public agencies that contract with CalPERS for retirement and/or health coverage (including local agencies).13 Related concepts: CalPERS Board of Administration, defined benefit pension plan, pension funds, pension system, and Public Employees Medical and Hospital Care Act (PEMHCA).

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CalPERS Board of Administration. This board oversees the CalPERS retirement system and associated programs. Under state law14 this thirteen member has the following membership:

Six elected members:

• Two elected by and from all CalPERS pension system members; • One elected by and from all state employee active members; • One elected by and from all CalPERS school employee active members; • One elected by and from all CalPERS local agency active members (in other words those

employed by local agencies who contract with CalPERS); • One elected by and from the retired CalPERS plan members;

Three appointed members:

• Two appointed by the Governor – one of whom must be a local elected official and another from the life insurance industry; and

• One public representative appointed jointly by the Speaker of the Assembly and the Senate Rules Committee.

Four ex officio (by virtue of their positions) members:

• The State Treasurer; • The State Controller; • The Director of the Department of Personnel Administration; and • A designee of the State Personnel Board.

The Board of Administration is responsible for the management and control of CalPERS, including the administration and investment of CalPERS’ pension trust fund. The Board is also responsible for managing a number of other funds and programs, including the system’s 457 plan and long-term care program. In addition, the Board administers the Public Employees' Medical and Hospital Care Act and the state's contract with the federal government for Social Security.15 Related concepts: duty of care and diligence, fiduciary duty, plan governance, retirement system board, and third-party administrator.

California State Teachers’ Retirement System (CalSTRS). In 1912, this pension system was founded for teachers in California.16 CalSTRS provides retirement related benefits and services to teachers in public schools and community colleges. CalSTRS provides three basic benefits:

• Service retirement based on a benefit formula • Survivor benefits • Disability retirement17

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The system is administered in accordance with the Teachers Retirement System Law.18 Related concepts: defined benefit pension plan, pension funds, pension system, retirement system board, Teachers Retirement Board, and third party administrator. Collective Bargaining. California’s labor relations law, known as the Meyers-Milias-Brown Act (MMBA),19 requires local agency employers to negotiate with groups of employees in good faith to try to determine mutually agreeable employment conditions. Salaries and benefits are a common subject of such negotiations—including pension and other post-employment benefits. For a glossary of terms relating to labor relations, please see the Institute’s A Local Official’s Guide to Labor Relations Terminology at www.ca-ilg.org/LaborRelationsGlossary. Related concept: Meyers-Milias-Brown Act. Comprehensive Annual Financial Report. This document presents a complete picture of the agency’s finances. It is sometimes referred to by the acronym CAFR (pronounced “kay-fur”). A “comprehensive annual financial report” supplements the basic financial statements; its contents are specified by generally accepted accounting principles (sometimes referred to by the acronym “GAAP”). Pension systems prepare comprehensive annual financial reports. In addition, when local agencies prepare their own comprehensive financial reports, one of the recommended components of the comprehensive financial report is a report on the agency’s funding of pension and other post-employment benefits.20 Contribution. See employer/employee contribution. Contribution Holiday. A practice of not requiring contributions from employers or employees (or both) during years when investment returns are sufficiently high to enable an agency to meet its projected pension obligations without additional contributions, based on actuary calculations. In other words, those contributing to the pension fund get a “holiday” from making contributions to the fund. There has been advisement against the use of contribution holidays.21 Related concepts: actuary, asset smoothing, fully funded, funding policy, funding ratio, GASB Statement 50, retirement system funding and super-funded. Cost of Living Adjustment. Some public employers have retirement benefits that include an annual cost of living adjustment (sometimes known by the acronym “COLA”) that helps maintain the retiree’s spending power.22 Related concept: benefit formula. Defined Benefit Pension Plan. This type of plan provides public employee retirees with a guaranteed lifetime monthly income, based on a predetermined statutory formula. This approach contrasts with defined contribution plans, although some employers offer a combination of the two kinds of plans—a concept known as a hybrid plan. There are a series of considerations that have been identified for local agencies to use in determining what kind of system makes sense for the local agency,23and essential design elements for defined benefit pension plans.24

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Defined benefit pension plans are typically funded by a combination of a flat employee contribution (which, as a result of labor negotiations processes, some public employers pick up all or part) and a fluctuating employer contribution based on the retirement fund’s investment performance and other factors. Under a defined benefit pension plan, employers bear the risk of underperforming assets that may not produce sufficient income to support a promised level of retirement benefits. In California, the promised level of benefits in defined benefit pension plans are typically based on a formula. The formula is based on an employee’s age at the time of retirement (which is then tied to a percentage factor), the employee’s length of service, and the highest one-year or three-year average pensionable wages earned by the employee. An example is the “2 percent at 60 formula” that provides 2 percent of the employee’s highest average compensation for each year of service at age 60. This means that someone retiring at 60 after 25 years of service could expect to receive 50 percent of their highest annual average compensation.25 Related concepts: 1937 Act Retirement System, benefit formulas, CalPERS, CalSTRS, employee/employer contributions, enhanced benefit formulas, one-year final compensation, pension benefit, pension spiking, pension systems and service credit. Defined Contribution Plan. This type of plan starts with a specified annual contribution amount from the employer, the employee or both. This approach contrasts with defined benefit pension plans, although some employers offer a combination of the two plans—a concept known as a hybrid plan. Finance officials offer a series of factors for local agencies to consider in determining what kind of system makes sense for a particular local agency,26 as well as essential design elements for such plans if they are the primary retirement plan.27 The benefits that the retiree receives are based on any employer and employee contributions and investment earnings reduced by administration fees. The only guaranteed amount is the annual employer and/or employee contributions because future benefits may fluctuate depending on investment earnings. In this way, the employee assumes the risk that investment results may produce lower than hoped-for retirement income. Related concepts: 401(k) plan and 457 plan.

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History of Defined Benefit Pension Plans

and Defined Contribution Plans

Defined Benefit Pension Plans Pensions date back to before America’s founding—to colonial militias. American Express, then a railroad freight forwarder, introduced its defined benefit pension plan in 1875; other railroads followed suit, followed by AT&T in 1906. By 1920, many large corporate employers offered defined benefit pension plans. The trend towards defined benefit plans received a boost in the 1930s, when tax advantages encouraged smaller companies to offer plans. By 1970, 45 percent of the American workforce participated in defined benefit plans. During this period, however, there were a number of notable pension plan failures. These failures led to closer regulation of private plans through the Employee Retirement Income Security Act (ERISA) in 1974. Defined Contribution Plans Defined contribution plans are more of a 20th century development, arising out of company profit sharing plans. The trend toward defined contribution plans started picking up momentum in the 1980s, with the passage of Internal Revenue Code amendments in 1978 that created the “401(k)” defined contribution option for private employers that allowed employees to save towards their retirement by deferring part of their income into an investment account without having to pay tax on that income. The increasingly extensive regulation of private defined benefit pension plans (for example, through the Employee Retirement Income Security Act and accounting requirements) reinforced this momentum, as did the year-to-year volatility/unpredictability of employer obligations under defined contribution plans in light of the importance of profit margins in the private sector.

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Disability Retirement. This form of retirement allows an eligible employee who is unable to perform the usual duties of his or her position due to a disability to retire early or for the duration of the disability. The disability typically relates to an illness or injury that is expected to be permanent or of an undetermined duration. The income amount is determined by a number of variables, including whether the cause of the disability is work-related, the nature of the employee’s work, and the specific provisions in the contract between the pension system and the employer.28 Related concept: early retirement. Duty of Care and Diligence. Members of public retirement system boards are fiduciaries and must perform their responsibilities to their retirement systems with the care, skill, prudence, and diligence under the given circumstances that a person exercising good judgment, acting in a similar capacity, and familiar with these matters would use in performing the same or similar services.29 This is also referred to as the “prudent person standard.” Related concept: fiduciary duty. Early Retirement. When an employee must stop working or chooses to stop working before the employee is eligible for normal retirement, some 1937 Act plans may provide for payment of a retirement allowance. The retirement allowance payable at the time of early retirement is usually lower than the normal retirement allowance.30 Related concept: disability retirement. Employee/Employer Contribution. In public pension systems, the amounts paid into a retirement trust fund can be divided into two parts: the part paid for by the employee and the part paid by the employer.

• Employee Contribution. This is typically a fixed percentage of the employee’s base salary that is necessary to help fund the retirement program. In some instances, the collective bargaining process has resulted in an employer’s agreement to pick up all or part of the employee contribution. In 1937 Act systems, the employee’s contribution varies by an employee’s age at time of hire.

• Employer Contribution. In defined benefit pension plans, the employer contribution is

typically an amount that an employer must contribute to the employer’s pension trust fund on a sustained, ongoing basis in order for the agency’s pension fund to be able to meet its obligations to employees (known as “expected future benefit payments,” see below). The employer contribution is the result of actuarial calculations, and generally consists of two components: 1) “Normal costs,” which are the current and future costs of employee pensions, and 2) Amortization of any unfunded liability.31 Note that for CalSTRS the employer contribution is determined by statute32.

Under some circumstances (particularly defined contribution systems), employers may agree to match employees’ contributions. 33 Related concepts: actuary, additional service credit (“air

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time”), asset smoothing, benefit formula, contribution holiday, funding policy, matching contributions and retirement system funding. Employer Paid Member Contribution (EPMC). As part of the collective bargaining process, a local agency may agree to pay all or part of the employee’s contributions required to be paid by specified members.34 Specific parameters must be met.35 These may or may not be included in pensionable wages. Enhanced Benefit Formulas. In the late 1990s/early 2000s, legislation (SB 40036/AB 61637) was enacted to create more advantageous benefit options for local agencies to offer their safety and miscellaneous public employees (3 percent at 50 or 55 for safety employees and 2.5 or 2.7 percent at 55 and 3 at 60 for miscellaneous employees). Entry-Age Normal Funding Method. A method for prefunding pension benefits performed by allocating the cost of each member’s pension on a level percent of payroll between the time employment begins (entry age) and the member’s assumed retirement date. This method is designed to help produce stable employer contributions that increase over time at the same rate as the employer’s payroll.38 Related concept: funding policy. Excess Assets. This situation occurs when a pension fund’s assets exceed its obligations to pension plan members (in other words, the actuary’s calculations indicate the fund has more than sufficient assets to pay all benefits that members have earned).39 Related concepts: fully funded, funded ratio, funding policy, normal cost, present value of future benefits, and unfunded liability. Expected Future Benefit Payments. Payments that are determined through a series of assumptions that include the age when members are expected to retire, how long members are expected to live (life expectancy) and economic factors that may affect the value of benefits or the value of assets held in a pension fund. Some of the factors that are considered are the inflation rate and the rate of base salary increases. Related concepts: actuarial assumptions, actuarial valuation, actuarial valuation report, actuary, assumed rate of return, and present value of future benefits. Fiduciary Duty. This is the principle that those on retirement system boards must perform their duties solely in the interest of the pension system’s participants/members.40 State law requires that retirement system board decisions must focus on providing benefits to members and their beneficiaries, minimizing employer contributions to the system, and covering the reasonable expenses of administering the system. 41 When there is a conflict among these objectives, the duty to members and their beneficiaries takes precedence over any other duty.42 Related concept: diligence and duty of care. Final Compensation. See pensionable wages.

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Fully Funded. This is status is achieved when a pension fund has sufficient assets to meet its commitments to participants (the financial target is more technically known as accrued actuarial liability). Note that a “fully funded” plan does not mean that employer/employee contributions should be zero. Related concepts: funded ratio, funding policy, normal cost, under-funded and unfunded liability. Funded Ratio. This is the product of a series of calculations that reveals, at a given point in time, the relationship between a pension fund’s assets and its liabilities.43 A 100 percent funded ratio means that the plan is fully funded. The excess of these accrued liabilities over the actuarial value of assets is referred to as the “unfunded liability,” and the ratio of actuarial assets to liabilities is referred to as the “funded ratio.” Funding Policy. The fundamental financial objective of a defined benefit pension plan is to fund the long-term cost of benefits promised to the plan members. Such resource accumulation typically occurs through employee and employer contributions, as well as investment earnings.44 In addition, actuarial principles typically require that the total cost of employee services be recognized in the period in which those services are provided. This helps achieve intergenerational equity among those who are called upon to financially support the plan, thereby avoiding the transfer of costs to future generations.45 A plan’s funding policy reveals a plan’s approach to these actuarial and funding issues46. Related concepts: entry-age normal funding method, funded ratio and prefunding. Governmental Accounting Standards Board (GASB). A nonprofit organization that develops accounting standards for various state and local governments (often referred to by the acronym “GASB” and pronounced “gaz-be”). This board establishes generally accepted accounting principles (sometimes referred to by the acronym “GAAP”) for state and local agencies. The board operates independently and does not enforce the use of its standards but there are strong incentives to follow these standards. For instance, adherence to these standards are necessary to receive a “clean” audit opinion on an agency’s financial statements.47 In addition, bond rating firms consider whether or not an agency follows these standards when determining what credit rating to assign to a debt issuance.48 Related concepts: GASB Statements 43 and 45, GASB Statement 50, GASB Statement 63(Proposed), and retirement system funding. GASB Statements 43 and 45. These are public agency financial statement and disclosure standards relating to “other post-employment benefit” commitments (sometimes referred to by the acronym OPEB) made by public agencies to their employees and retirees. Among other things, these accounting standards, adopted in 2004, state that government employers must report the cost of other post-employment benefits while the employee is working and earning those benefits, rather than in the period (often many years later) when the benefits

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are paid or provided (sometimes referred to as “pay-as-you-go”).49 This approach: 1) requires public agencies to measure and recognize these costs (expenses) over a period of time that approximates employees’ years of service, and 2) provides information about the anticipated financial costs associated with these benefits and whether or not a local agency has adequate resources on hand to pay for those future commitments.50 Related concepts: CAFR, GASB, GASB Statement 50, OPEB, pay-as-you-go, and retirement system funding. GASB Statement 50 (Amending GASB Statements 25 and 27). A public agency financial statement and disclosure standard relating to defined benefit pension plans. Among other things, this accounting standard, adopted in 2007, aligns the financial reporting requirements for pensions with those for other postemployment benefits (see GASB Statements 43 and 45). GASB Statement 50 amends prior standards (GASB Statements 25 and 27) to require defined benefit pension plans to disclose various information regarding the plans’ funded status and the methodologies and assumptions used to determine that status. As with GASB Statements 43 and 45, the goal of the changes is to improve the transparency and usefulness of financial reporting by pension systems and public employers participating in such systems.51Related concepts: GASB, GASB Statements 43 and 45 and retirement system funding. GASB Statement 63 (Proposed--Amending GASB Statement 34). This proposed financial statement and disclosure standard is intended to help those who review public agency financial reports understand how past transactions may impact an agency’s future financial statements.52 Government Finance Officers Association (GFOA). This is a membership organization (sometimes referred to by the acronym “GFOA”), whose mission is to enhance and promote the professional management of governments for the benefit of the public. The association does this by identifying and developing financial policies and best practices and promoting their use through education, training, facilitation of member networking, and leadership.53 Hybrid Pension Plans. These types of plans offer a combination of defined benefit pension plans and defined contribution plans to employees.54 Related concepts: defined benefit pension plans and defined contribution plan. Internal Revenue Code (IRC). The Internal Revenue Code is where federal tax law is found and codified with other federal law in the United States Code. These code books are divided into numbered “titles” or sections based on subject matter. The Internal Revenue Code is also known as Title 26 of the United States Code. Investment Policies. California law requires public pension systems to diversify their investments to minimize the risk of loss and to maximize the rate of return, unless under the circumstances it is clearly not prudent to do so.55 Because investments involve risk, the

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Association of Public Pension Fund Auditors issued a report to retirement system boards and other pension trust fund managers so that they could better understand, categorize and manage the investment risks. A clear framework for understanding and categorizing risk is a fundamental step in managing pension funds effectively.56 Related concept: asset allocation. Investment Return Sensitivity Analysis. This analysis identifies potential pension costs to employers if investment returns fall below or rise above a targeted investment return threshold. The analysis provides additional information to employers about potential future costs of defined benefit pension plans.57 Related concepts: actuarial assumptions, actuary, and assumed rate of return. Life Expectancy. This is the length of time a person of a given age is expected to live. The period of time is a statistical average, based on mortality tables showing the rate of death at each age. Life expectancy assumptions factor into cost calculations for defined benefit pension plans, since the plan is committed to make payments for the balance of each retiree’s post retirement life. Related concept: actuary. Market Value of Assets. This is the cash value or the amount that a pension fund’s assets could be sold for.. Related concepts: actuary (assumed rate of return), asset smoothing and investment policies. Matching Contributions. These are contributions made by an employer to a defined contribution plan on an employee’s behalf when the employee makes elective or non-elective contributions.58 Related concept: employee/employer contribution. Member. Pension systems often refer to those who are participating in the plan as a “member” of the system. This term also is defined and used in most California public pension laws. A “member” can be active, inactive or retired; a survivor or beneficiary of an employee who is a plan member is also considered a member. Related concepts: active member, miscellaneous employees, participant, and safety employees. Member Contributions. See employee/employer contributions. Meyers-Milias-Brown Act. The California labor relations law59 that requires local agency employers to negotiate in good faith with groups of employees to try to determine mutually agreeable employment conditions, including pension benefits and other post-employment benefits. Related concept: collective bargaining. For a glossary of terms relating to labor relations, please see the Institute’s A Local Official’s Guide to Labor Relations Terminology at www.ca-ilg.org/LaborRelationsGlossary.

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Miscellaneous Employees. These are “non-safety” or general employee participants in public pension systems. “Safety” employees are involved in law enforcement, fire suppression, or the protection of public safety.60 “Miscellaneous” employees are everyone else eligible to participate in a pension system. The reason underlying the distinction is that the benefit formula for safety employees typically yields higher pension benefits. Related concepts: benefit formula and safety employees. Non-pooled Agency. This is a public agency that has more than the legally mandated number of employees necessary to establish an individual pension fund.61 These non-pooled agencies are large enough to allow them to spread the risks associated with defined benefit pension plans among a larger number of employees. Related concepts: pooled agency and risk-sharing pool. Normal Cost. Computed differently under different funding methods, the employer’s annual “normal cost” represents the present value of benefits that pension system members earn during the valuation year. This term is sometimes also referred to as “current normal cost.” Related concepts: actuary, assumed rate of return, employer/employee contribution, funding policy, and present value of future benefits. One-Year Final Compensation. In defined benefit pension plans, an approach to the benefit formula, in which the final average pensionable wages amount used to compute the employee’s retirement benefit, is based on the final or highest one year. An alternative approach is to use an average of the final or highest three years’ pensionable wages. Other Post-Employment Benefits (OPEB). In addition to pensions, many state and local governmental employers provide other post-employment benefits (OPEB) as part of the overall compensation package a public agency offers to its employees. This includes employer-provided health insurance for retirees, as well as other forms of benefits that can be received after retirement (for example, life insurance).62 Related concepts: GASB Statements 43 and 45. Over‐Funded. See excess assets. Participants. Often referred to as “members” of an agency’s pension system, this term refers to those that participate in an agency’s pension plan and include the following:

• Active members; • Deferred members; • Retired members; and • Beneficiaries, former spouses and survivors of members.

Related concepts: members, miscellaneous employees, and safety employees.

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Pay‐As‐You‐Go Benefits. A situation in which agencies pay for the cost of benefits as those costs are incurred, as opposed to pre-funding such benefits (also known as the “current disbursement cost method”63). Agencies sometimes use this approach for paying for other post employment retirement benefits. Related concepts: GASB Statements 43 and 45, GASB Statement 50 and retirement system funding. Pension Benefit. See benefit formula and other post-employment benefits. Pension Cost Volatility. Volatility is the measure of the price of a financial instrument over time. These financial instruments may experience swings in value from year to year due to the fluctuating nature of financial markets. In an effort to minimize volatility in pension costs, some pension systems use a “smoothing” approach, in which investment gains and losses are recognized over an extended period allowing employer contributions to be more evenly allocated.64 Related concept: asset smoothing. Pension Fund. This is a pool of assets made up of the contributions to a pension system and investment earnings on those contributions that will be used to finance pension benefits. The participants/members have a legal or beneficial right to or some other contractual claim against the assets of the pension fund.65 Related concepts: pension system and trust fund Pension Obligation Bonds. When a public agency has an unfunded liability, it normally reduces that liability over time as part of its annual required pension contribution. Some agencies, however, have elected to incur debt through the issuance of pension obligation bonds in an effort to reduce their unfunded actuarial liability as a part of the overall strategy for managing pension costs. Finance professionals counsel caution in using this approach.66 Pension Spiking. A practice of increasing an employee’s retirement benefits (without a change in the benefit formula) by dramatically increasing, just prior to retirement, the employee’s base salary; another way the increase can occur is by including special compensation or non-salary items (such as unused vacation pay, mileage pay, uniform allowance or other allowances) in the employee’s final pensionable wages used to calculate the employee’s retirement benefits.67 Related concepts: benefit formula and one-year final compensation. Pension System. In California, there are a number of kinds of entities through which public agency employers provide pension benefits: The California Public Employees Retirement System,68 county plans adopted under the state law known as the 1937 Act,69 and the State Teachers Retirement System.70 Some charter agencies have systems established under their charter authority. Related concept: pension fund. Pensionable Wages. For purposes of retirement, this is an employee’s base salary plus any special compensation allowed to be counted as part of an employee’s overall compensation for purposes of calculating pension benefits under a pension system’s benefit formula. Special

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compensation may include any payments for special skills as well as such items such as bonus pay, incentive pay, longevity pay, and value of employer paid member contributions.71 Related concepts: base salary, benefit formulas, one-year final compensation and employer/employee contributions. Plan Governance. Generally refers to the systems and processes that pension systems use to administer pension benefits and manage the investment of retirement assets, with the objective of maximizing investment returns at an acceptable level of risk and reducing potential conflicts of interest. Governance systems and processes cover areas such as organizational transparency (including having clear, documented, and accessible policies) and commitment to knowledge and skill enhancement.72 Plans have begun to address increased organizational transparency and disclosures of potential and real conflicts of interest. There are a series of recommendations relating to governance practices.73 Related concepts: duty of reasonable care and diligence, fiduciary duty, and investment policies. Plan Sponsor. This is the agency or entity that contracts with a pension system to provide a vehicle for funding pension benefits. Beyond the public agency context, plan sponsors can include private businesses acting for their employees, unions acting on behalf of their members as well as state and local agencies operating on behalf of their employees.74 Pooled Agency. A group of employers that join together because individually they do not have the required number of employees needed to establish an individual pension fund.75 Pooling of agencies allows these agencies to combine investments and actuarial risks that are associated with defined benefit pension plans, and spread them among multiple agencies. This practice helps to reduce pension cost volatility for smaller agencies. Related concepts: non-pooled agency and risk-sharing pool. Pre-Funding. This is a process of accumulating resources for future benefit payments during the active service life of employees.76 Such resource accumulation typically occurs through employer and employee contributions, as well as investment earnings.77 This also helps to achieve intergenerational equity among those who are called upon to financially support the plan, thereby avoiding the transfer of costs to future generations.78 The Government Finance Officers Association recommends prefunding other post-employment benefits, for example health and life insurance.79 This contrasts with the pay-as-you-go approach. Related concepts: employer/employee contributions, funding policy, GASB Statements 43 and 45, GASB Statement 50, investment returns, and retirement system funding.

Present Value. The key task for defined benefit pension plan administrators and their actuaries is to determine how much the pension trust fund needs to have on hand in order to meet current and future pension benefit obligations. The concept of “present value” is useful in calculating how much in employer/employee contributions a pension fund needs to receive and invest now in order to meet its projected obligations. The present value of a future payment is

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what money is worth now in relation to what someone thinks it will be worth in the future based on expected earnings. For example, if one expects to make a 10 percent return on an investment, $1,000 is the present value of the $1,100 one expects to have a year from now. Related concepts: actuary, assumed rate of return, employer/employee contribution, funding policy, investment policy, present value of future benefits, and unfunded liability.

Present Value of Projected Benefits (PVB). This is a calculation in which future pension benefit payments (actuarial accrued liability) are expressed in today’s dollars using assumed rates of return. This discounted value calculation of all future expected benefit payments is based on various actuarial assumptions. This concept is relevant to a pension system’s effort to determine such things as a plan’s funded ratio and whether employer/employee contributions need to be increased in order to satisfy the agency’s funding policy. Related concept: actuary, expected future benefits. Public Employees’ Medical and Hospital Care Act (PEMHCA). This is the state law that governs the administration of CalPERS’ health benefits program for those who participate in it.80 Public Records and Pensions. Information given to the retirement system by a member, such as date of birth, social security number, is confidential member information. Information to or from the pension plan and the employer is general public information.81 An appellate court has held that, other non-confidential public information is subject to disclosure if requested including the name, date of retirement, department retired from, last position held, years of service, base allowance, cost of living adjustment, total health allowance and monthly pension benefit of each retiree.82 Qualified Plan. This is a type of retirement plan established by an employer that meets the requirements of federal law.83 A qualified plan may be a defined benefit pension plan or a defined contribution plan. Amounts contributed to the plan, and the interest earned on these investments, are not subject to income tax until the money is taken out during retirement or upon separation from the employer. An example of such a plan is a 401(k). Reciprocity or Reciprocity Agreements. These agreements allow public employees to maintain portability when moving from one public employer to another. Depending on the specifics of the agreement or governing regulations, some systems may recognize a member’s participation in each system when determining eligibility for benefits and when calculating retirement benefits.84 Related concept: portability. Replacement Benefit Plan (RBP). Federal tax law limits the annual benefit an individual can receive from a tax-qualified pension plan at a certain dollar amount per year,85 which may be less than what an employee expects to receive under the agency’s benefit formula. “Replacement benefit plans” are a mechanism to enable the employee to receive the full amount

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promised. These amounts are subject to federal taxes to the extent the employee was subject to these taxes during duration of employment.86 Employers pay for the benefit; CalPERS has a sheet that explains such plans further.87 Note that there have been state legislative efforts to limit the availability of such benefits for future hires.88 Retired Annuitant. This is an employee who has retired and is collecting pension benefits under a defined benefit pension plan.89 Because of these employees’ skills and expertise (or the employees’ desire to transition more gradually into full retirement), agencies will sometimes hire them for limited periods. For those who are receiving benefits under the CalPERS’ system, there are limits on: 1) how many hours such retirees may work, and 2) the duration of their tenure.90 Retirement System Board. The group of individuals that, as a governing board, make decisions on behalf of a public pension system --sometimes referred to as a board of administration, board of trustees, or board of directors.91 The board has the sole and exclusive fiduciary responsibility over the pension system’s assets.92 State law requires that the board administer the system in a manner that will assure prompt delivery of benefits and related services to the members and their beneficiaries.93 The membership of a board is typically established by state law and cannot be changed without local voter approval.94 Related concepts: board of retirement, CalPERS Board, duty of care and diligence, fiduciary duty, and Teachers Retirement Board. Retirement System Funding. Employee/employer contributions are placed in a dedicated trust fund set up for the sole purpose of paying benefits. The contributions are invested and earn investment returns. Benefits and expenses associated with the trust fund are paid out of the fund. Any increase in the benefits and expenses will necessitate an increase in employee/employer contributions, a higher investment return or both. Pension fund assets are invested in a variety of investment vehicles including, but not limited to, stocks, bonds, and real estate.95 Risk-Sharing Pools. This is a tool to moderate volatility in pension costs for smaller employers by spreading the risk of demographic gains and losses across small plans that offer the same benefit formula.96 Related concepts: non-pooled agency and pooled agency. Safety Employees. In pension benefit formulas, police, sheriffs, firefighters, and other public safety employees have their pension benefits calculated at a higher rate, with corresponding higher employer/employee contributions.97 Some safety employees do not receive Social Security benefits. Related concepts: benefit formula and miscellaneous employees. Second Tier Options. A “tier” refers to a group of employees whose retirement benefits are different from those of other colleagues at the agency. For example, a new benefit tier might apply to employees hired after a specific date, while those hired previously receive different (usually higher) benefits. Second tiers may combine defined benefit pension plan and defined

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contribution plan designs (also referred to as a hybrid pension plan). Second tier options also include lowering benefit formulas or removing certain optional benefit upgrades from the employer’s contract (for example: employer paid member contributions, post-retirement survivor allowance, cost-of-living allowances and disability retirement).98

Sensitivity Analysis. See Investment Sensitivity Analysis. Service Credit. Under a defined benefit pension plan, the length of an employee’s employment or total years of service within the pension system is one element used to calculate the benefit formula. Public employees generally receive one year of service credit for each year worked. Related concepts: air time, portability, benefit formula, and reciprocity. Social Security and Pension Plans. Some local agencies have elected to have their employees contribute to Social Security. Other agencies, however, do not and therefore are not part of the Social Security system. Employees who are not members therefore are not entitled to Social Security benefits upon retirement, death or disability.99 Related concept: three-legged stool. Super‐Funded. This is a condition existing when the actuarial value of assets exceeds the present value of benefits. When this condition exists on a given valuation date for a given plan, employee/employer contributions for the rate year covered by that valuation may be waived.100 A pension trust fund is considered to be “super-funded” when assets exceed the amounts necessary to meet the anticipated current and future demands on the fund. Related concept: contribution holiday.

Teachers Retirement Board. This board oversees the CalSTRS retirement system and associated programs. The board is comprised of 12 members:

• Three positions representing current educators elected by members; • A retired CalSTRS member appointed by the Governor and confirmed by the Senate; • Three public representatives appointed by the Governor and confirmed by the Senate; • A school board representative appointed by the Governor and confirmed by the Senate;

and • Four board members who serve in an ex-officio capacity by virtue of their office: Director

of Finance, State Controller, State Superintendent of Public Instruction, and State Treasurer.101

Related concepts: California State Teachers’ Retirement System, duty of care and diligence, fiduciary duty, plan governance, retirement system board, and third-party administrator.

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Three‐Legged Stool. This is the theory that a combination of an individual’s savings, Social Security, and pension will provide secure retirement income.102 Related concept: Social Security and pensions. Total Compensation. See pensionable wages. Trust Fund. Money and assets of a pension system are held in a separate fund, separate from other employer assets and are protected from third-party creditor claims. The fund may only be used to provide benefits to pension system members (and their beneficiaries) and to defray reasonable expenses of managing the pension fund.103 Two-Tier Retirement Systems. See second tier options. Under‐Funded. When a pension fund’s obligations to pension plan members exceed the fund’s assets (in other words, the actuary’s calculations indicate the fund has insufficient assets to pay all benefits that members have earned) the plan has unfunded liabilities (sometimes referred to by the technical term “unfunded actuarial accrued liability”). When this condition occurs, a pension plan is deemed under-funded.104 Related concepts: actuarial accrued liability, fully funded, funded ratio, funding policy, normal cost, present value of projected benefits, and unfunded liability.

Unfunded Liability. This exists when the value of benefits estimated to be payable to plan members as a result of their service exceeds the projected value of plan assets available to pay those benefits. This phenomenon is sometimes referred to as “unfunded actuarial accrued liability” (sometimes referred to by the acronym UAAL). This amount changes over time as a result of changes in benefits, pay levels, rates of return on investments, changes in other actuarial assumptions, and changes in the demographics of the employee base.

Public entities typically reduce an unfunded pension liability over time as part of their annual employer contribution. Under standards set by the Governmental Accounting Standards Board (GASB), unfunded liabilities should be addressed over a period of not more than 30 years in order to provide reasonable assurance of the payment of future benefits.105 Related concepts: actuary (actuarial assumptions), fully funded, funded ratio, funding policy, normal cost, pension obligation bonds, present value of projected benefits, and under-funded.

Vested Benefits. In a defined benefit pension plan, vesting means the pension plan participant is eligible to receive pension benefits when he or she meets the length of service and age requirements. A member’s vested benefits cannot be taken away even if:

• The member stops working for the employer; and • Never works in covered employment again.

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For example, in the CalPERS system, if the former employee is younger than the minimum age for retirement, they may leave their contributions on deposit with the system. After they reach or exceed the minimum age, they can apply for retirement benefits consistent with service credit earned before they left their employment.106

When an employee becomes vested in a retirement account, it can also mean that the employee has a right to withdraw the money contributed to their agency’s pension fund on their behalf.107 Amounts distributed amounts may be subject to taxes and early withdrawal penalties.108 Vested Rights. The legal concept that, once earned, the employee becomes entitled to the benefit promised. In California, this concept constrains public agencies from repealing or modifying their pension plans for those employees who have performed the necessary service to be entitled to benefits given that level of service.109 However, under limited circumstances, certain kinds of changes to pension plans have been upheld.110 Whether and to what extent public employers are permitted to alter vested rights of their employees is a topic that is receiving a significant amount of attention and continues to be the subject of litigation. Close consultation with agency counsel should occur as part of any analysis relating to changing pension benefits.111 Volatility. See pension cost volatility.

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Caveats This document is a service of the Institute for Local Government (ILG) whose mission is to promote good government at the local level with practical, impartial, and easy-to-use resources for California communities. ILG is the nonprofit 501(c)(3) research and education affiliate of the League of California Cities and the California State Association of Counties. The Institute acknowledges the complexity of these issues. This glossary has attempted to translate these highly technical concepts into understandable terms that can be a starting point for elected officials, policy makers, the media and the general public to participate in conversations about pension issues. Readers should understand that the effort to be as clear as the subject allows has resulted in the omission of certain technical and legal nuances. . These materials should not be relied on as complete statements of the concepts described, nor should they be considered legal advice relating to pension issues. Officials are encouraged to consult with staff and other technical experts for up-to-date information and guidance on how these concepts apply in specific situations. The Institute welcomes feedback on this resource:

• Email: info@ca-ilg.org Subject: A Local Officials Guide to Pension Terminology • Fax: 916.444.7535 • Mail: 1400 K Street, Suite 205 ▪ Sacramento, CA ▪ 95814

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Endnotes, References and Additional Resources 1 See State Association of County Retirement Systems, New Trustee Handbook/CD, available from https://web.memberclicks.com/mc/quickForm/viewForm.do?orgId=slgs&formId=82555 (“SACRS Glossary”); CalPERS Glossary, available online at http://www.calpers.ca.gov/index.jsp?bc=/utilities/glossary/home.xml. 2SACRS Glossary at 276. 3 See Cal. Const. Art. XVI, § 17(e); see also Cal. Gov’t Code § 7504(a) (“(a) All state and local public retirement systems shall, not less than triennially, secure the services of an enrolled actuary. An enrolled actuary, for the purposes of this section, means an actuary enrolled under subtitle C of Title III of the federal Employee Retirement Income Security Act of 1974 (Public Law 93-406) and who has demonstrated experience in public retirement systems. The actuary shall perform a valuation of the system utilizing actuarial assumptions and techniques established by the agency that are, in the aggregate, reasonably related to the experience and the actuary's best estimate of anticipated experience under the system. Any differences between the actuarial assumptions and techniques used by the actuary that differ significantly from those established by the agency shall be disclosed in the actuary's report and the effect of the differences on the actuary's statement of costs and obligations shall be shown.”) 4 SACRS Glossary at 275-294. 5 SACRS Glossary at 275-294. 6 SACRS Glossary at 275-294. 7 The Government Finance Officers Association publishes best practice recommendations for asset allocations for both defined benefit and defined contribution plans. See GFOA, Asset Allocation Guidance for Defined Benefit Plans (1999 and 2009) (CORBA), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1605, Asset Allocation Guidance for Defined Contribution Plans (1999 and 2009) (CORBA), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1606 . 8 See CalPERS Toolkit at 19. 9 See Cal. Gov’t Code §§ 31520-31538. 10 See Cal. Gov’t Code §§ 31520.2. 11 Cal. Gov’t Code §§20000 and following. 12 CalPERS, Facts at a Glance (June 2011), available online at http://www.calpers.ca.gov/eip-docs/about/facts/general.pdf. 13 SACRS Glossary at 278. 14 Cal. Gov’t Code §20090. 15See CalPERS website: http://www.calpers.ca.gov/index.jsp?bc=/about/organization/board/structure-responsibilities.xml. 16 SACRS Glossary at 278. 17 See CalSTRS at a Glance at http://www.calstrs.com/About%20CalSTRS/ataglance.aspx. 18 See Cal. Gov’t Code §§ 22000-28101, available at http://www.calstrs.com/Help/forms_publications/printed/TeachersRetirementLaw.pdf . 19 Cal. Gov’t Code §§ 3500-3511. 20 See GFOA, General Purpose Checklist for [Comprehensive Annual Financial Report] Preparer, available at http://www.gfoa.org/downloads/GENERALPURPOSECHECKLIST.pdf. See also GFOA, Governmental Accounting, Auditing, and Financial Reporting Practices (1983, 1997, and 2006) (CAAFR), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1461, and GFOA, Web Site Presentation of Official Financial Documents (2009), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1472. 21 See GFOA Advisory, Responsible Management and Design Practices for Defined Benefit Pension Plans (2010), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1665 . 22 See, for example, Cal. Gov’t Code §§ 21310 and following (cost of living provisions for CalPERS). 23 See GFOA, Developing a Policy for Retirement Plan Design Options (1999, 2007) (CORBA), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1608 .

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24 See GFOA, Essential Design Elements of Defined Benefit Retirement Plans (2008) (CORBA), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1611; Sustainable Funding Practices of Defined Benefit Pension Plans (1994, 2005, 2008 and 2009) , available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1627 ; Responsible Management and Design Practices for Defined Benefit Pension Plans (2010), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1665 . 25 CalPERS Toolkit at 11 and 14. 26 See GFOA, Developing a Policy for Retirement Plan Design Options (1999, 2007) (CORBA), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1608 . 27 See GFOA, Essential Design Elements of Defined Contribution Plans as the Primary Retirement Plan (2008), available at http://www.gfoa.org/downloads/DCPlansFINAL.pdf. 28 See Cal. Gov’t Code §§ 21154-21176 (PERS), §§ 31720-31755.3 (1937 Act County Systems). 29 Cal. Const. Art. XVI, § 17(c). See also Cal. Gov’t Code §53216.6(b). 30 See SACRS Glossary at 280. 31 See SACRS Glossary at 288. 32 California Education Code §§22950 and 22951 33 See SACRS Glossary at 275-294. 34 CalPERS Compensation Review, available at http://www.calpers.ca.gov/eip-docs/employer/er-forms-pubs/pubs/manuals/pa-ret-manual/pm-compensation-review.pdf 35 See, for example, Cal. Gov’t Code § 20691. See also 2 Cal. Code of Regs §569. 36 SB 400, Chapter 555 of the Statutes of 1999, amended Government Code Sections 20391, 20392, 20393, 20395, 20397, 20398,20405.1, 20405.3, 20407, 20409, 20677, 20683, 20687, 20822, 21070,21071, 21072, 21073, 21073.5, 21077, 21130, 21337, 21353, 21353.5,21362, 21363, 21363.5, 21369, 21372, 21373, 21374, 21403, 21407,21572, 21573, and 21581; it added Government Code Sections 20035.5, 21070.5,21070.6, 21073.1, 21073.7, 21251.13, 21328, 21354.1, 21362.2,21363.1, and 21369.1; and repealed Government Code Sections 21363.6 and 21573.5; and added and repealed Government Code Section 21574.7. The bill is available online at http://info.sen.ca.gov/pub/99-00/bill/sen/sb_0351-0400/sb_400_bill_19990929_chaptered.html. 37 AB 616, Chapter 782 of the Statutes of 2001, amended Government Code Sections 20677 and 31621.11; added Government Code Sections 21354.3, 21354.4, 21354.5, 31621.8, 31676.17, 31676.18,31676.19, and 31808.9. It is available online at http://info.sen.ca.gov/pub/01-02/bill/asm/ab_0601-0650/ab_616_bill_20011013_chaptered.html . 38 CalPERS On-line Glossary. Available online http://www.calpers. ca.gov/index.jsp?bc=/utilities/glossary/home.xml#eg 39 See CalPERS Glossary, available at http://webcache.googleusercontent.com/search?q=cache:LQCClmLt3ikJ:www.calpers.ca.gov/index.jsp%3Fbc%3D/utilities/glossary/home.xml+calpers+and+%22excess+assets%22&cd=2&hl=en&ct=clnk&gl=us. 40 See Hittle v. Santa Barbara County Employees Retirement, 39 Cal. 3d 374, 392-93, 216 Cal. Rptr. 733,743-44 (1985) (noting the fiduciary relationship between retirement system boards and participants). 41 Cal. Const. Art. XVI, § 17(b). See also Cal. Gov’t Code §53216.6. 42 Cal. Const. Art. XVI, § 17(b). 43 SACRS Glossary at 280. 44 GFOA Best Practices Sustainable Funding Practices of Defined Benefit Pension Plans http://www.gfoa.org/index.php?option=com_content&task=view&id=1627 45 GFOA Best Practices Sustainable Funding Practices of Defined Benefit Pension Plans http://www.gfoa.org/index.php?option=com_content&task=view&id=1627 46 GFOA Best Practices Sustainable Funding Practices of Defined Benefit Pension Plans http://www.gfoa.org/index.php?option=com_content&task=view&id=1627 47 Government Accountability Office, State and Local Government Pension Plans: Governance Practices and Long-term Investment Strategies Have Evolved Gradually as Plans Take On Increased Investment Risk (August 2010). Available at http://www.gao.gov/new.items/d10754.pdf

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48 Government Accountability Office, State and Local Government Pension Plans: Governance Practices and Long-term Investment Strategies Have Evolved Gradually as Plans Take On Increased Investment Risk (August 2010). Available at http://www.gao.gov/new.items/d10754.pdf 49 Governmental Accounting Standards Board (GASB) Summary of Statement No. 45 Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions (Issued 6/04), available at http://www.gasb.org/st/summary/gstsm45.html; Governmental Accounting Standards Board (GASB) Summary of Statement No. 43Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans (Issued 4/04), available at http://www.gasb.org/st/summary/gstsm43.html. See also GASB 43 and 45 Resource Center: http://www.gasb.org/jsp/GASB/Page/GASBSectionPage&cid=1175804831062. 50 Governmental Accounting Standards Board (GASB) Summary of Statement No. 45 Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions (Issued 6/04). 51 Governmental Accounting Standards Board (GASB) Summary of Statement No. 50 Pension Disclosures—An Amendment of GASB Statements No. 25 and No. 27(Issued 05/07), available at http://www.gasb.org/st/summary/gstsm50.html . 52 Governmental Accounting Standards Board (GASB) Summary of Statements No. 63 and 64 (Issued 7/11), available at http://gasb.org/cs/ContentServer?site=GASB&c=GASBContent_C&pagename=GASB%2FGASBContent_C%2FGASBNewsPage&cid=1176158736377 53 See About GFOA, http://www.gfoa.org/index.php?option=com_content&task=view&id=76&Itemid=96. 54 See, for example, GFOA, Essential Design Elements of Hybrid Retirement Plans, (2008), available at http://www.gfoa.org/downloads/HybridPlansFINAL.pdf 55 Cal. Const. Art. XVI, § 17(d). See also Cal. Gov’t Code §53216.6(c). 56 GFOA, Endorsing a Framework for Understanding Pension Fund Risk (2001), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1609 . The Government Finance Officers Association has issued a number of checklist and recommended practices for investment policies and choosing investment advisors. GFOA, Investment Policies Governing Assets in a Deferred Compensation Plan (2004) , available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1620 , and Checklist, available at http://www.gfoa.org/downloads/InvestmentPolicyChecklistforDCPlans.pdf ; Pension Investment Policies (2003) , available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1623 , and Checklist available at http://www.gfoa.org/downloads/PIPchecklist6.pdf , Public Employee Retirement System Investments (1993, 1995, 1997 and 2009), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1624 ; GFOA Advisory, Selection of Investment Advisers for Pension Fund Assets (2000) (CORBA), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1666. 57 CalPERS Toolkit at 17. 58 SACRS Glossary at 282 59 Cal. Gov’t Code §§ 3500-3511. 60 CalPERS State Member Benefits (February 2002) available at http://www.calstatela.edu/univ/hrm/docs/CalPERS_55.pdf 61 Cal. Gov’t Code § 20000-2170. 62 The Government Finance Officers Association offers a set of recommended best practices relating to funding these benefits as well as a set of cautions concerning the use of bonds to finance them. GFOA, Considerations for Prefunding OPEB Obligations (2008) (BUDGET and CORBA), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1551. Ensuring the Sustainability of Other Postemployment Benefits (2007) (CORBA & BUDGET), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1610. 63 SACRS Glossary at 285. 64 CalPERS Toolkit at 20. 65 OECD, Private Pension: OECD Classification and Glossary (2005) at. 47. 66 The Government Finance Officers Association has issued recommendations on the analytic factors that should be evaluated before an agency decides to issue pension obligation bonds. GFOA Advisory, Evaluating the Use of

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Pension Obligation Bonds (1997 and 2005) (DEBT & CORBA), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1655. 67 SACRS Glossary at.287. 68 Cal. Gov’t Code §20000-2170. 69 Cal. Gov’t Code § 31450 and following, which authorizes counties to create and operate retirement systems for county and other local agency employees. Twenty California counties operate retirement systems under the 1937 Act. 70 See generally, Cal. Educ. Code § 22000 and following, available at http://www.calstrs.com/Help/forms_publications/printed/TeachersRetirementLaw.pdf. 71 See, for example, Cal. Gov’t Code § 20636; 2 Cal. Code of Regs. § 571(a) and (b); CalPERS Compensation Review, available at http://www.calpers.ca.gov/eip-docs/employer/er-forms-pubs/pubs/manuals/pa-ret-manual/pm-compensation-review.pdf . 72 Government Accountability Office, State and Local Government Pension Plans: Governance Practices and Long-term Investment Strategies Have Evolved Gradually as Plans Take On Increased Investment Risk (August 2010), available at http://www.gao.gov/new.items/d10754.pdf . 73 GFOA, Governance of Public Employee Post-Retirement Benefits Systems (2010) (CORBA), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1628. 74 SACRS Glossary at 285. 75 Cal. Gov’t Code §20000-2170 76 GFOA, Best Practices Sustainable Funding Practices of Defined Benefit Pension Plans, available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1627. 77 GFOA, Best Practices Sustainable Funding Practices of Defined Benefit Pension Plans, available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1627. 78 GFOA, Best Practices Sustainable Funding Practices of Defined Benefit Pension Plans, available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1627. 79 Considerations for Prefunding OPEB Obligations (2008) (BUDGET and CORBA), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1551. 80 Cal. Gov’t Code § 22751-22948. 81 Cal. Gov’t Code §6250-6270 (known as the California Public Records Act). 82 Sacramento County Employees' Retirement System (SCERS) v. Superior Court,195 Cal. App. 4th 440 (2011). 83 Specifically Internal Revenue Code Section 401(a), 26 U.S.C. § 401(a), and the Employee Retirement Income Security Act of 1974 (ERISA). Portions of ERISA are codified in various places of the United States Code, including 29 U.S.C. ch.18, and 26 U.S.C §§ 219, 408 (relating to the Individual Retirement Account), 410- 415, 4971, 4974, 4975. 84 CalPERS Toolkit at 15. See also CalPERS, When You Change Retirement Systems, available at https://www.calpers.ca.gov/mss-publication/pdf/x3tUNJH0WDfFg_pub16-booklet.pdf . 85 See 26 U.S.C. § 415(b). 86 CalPERS IRC Section 415 & CalPERS Replacement Benefit Plan Fact Sheet,available at http://www.calpers.ca.gov/eip-docs/about/pubs/member/general/miscellaneous-information/internal-revenue-code-section415.pdf 87 CalPERS IRC Section 415 & CalPERS Replacement Benefit Plan Fact Sheet,available at http://www.calpers.ca.gov/eip-docs/about/pubs/member/general/miscellaneous-information/internal-revenue-code-section415.pdf 88 AB 1184, introduced during the 2011-12 California Legislative Session. 89 See Cal. Gov’t Code § 20012. 90 See Cal. Gov’t Code § 21221(h) (annuitant cannot work more than 960 hours in any fiscal year, and an appointment under this section may not exceed 12 months total; governing body resolution required to “appoint” the annuitant); § 21224 (annuitant may provide specialized skills for a limited duration as long as the hourly rate paid is the same as paid by the employer to other employees performing the same or comparable duties; no governing body resolution required, annuitant is limited to 960 hours in a fiscal year, and position is supposed to be of “limited duration”).

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91 Cal. Const. Art. XVI, § 17(h). 92 Cal. Const. Art. XVI, § 17(a). 93 Cal. Const. Art. XVI, § 17(a). 94 Cal. Const. Art. XVI, § 17(f). 95 CalPERS Toolkit at 18. 96 CalPERS Toolkit at 20. 97 See Cal. Gov’t Code § 20420 (CalPERS); SACRS Glossary at 275-294. 98 The Government Finance Officers Association has a set of recommendations on creating multi-tier systems. See GFOA, Designing and Implementing Sustainable Pension Benefit Tiers (2011), available at http://www.gfoa.org/index.php?option=com_content&task=view&id=1887. 99 CalPERS Toolkit at 15. 100 SACRS Glossary at 287. 101 See http://www.calstrs.com/About%20CalSTRS/Teachers%20Retirement%20Board/index.aspx. 102 SACRS Glossary at 288. 103 Cal. Const. Art. XVI, § 17(a). See also Cal. Gov’t Code §53216.6. 104 SACRS Glossary at 288. 105 Government Accountability Office, State and Local Government Pension Plans: Governance Practices and Long-term Investment Strategies Have Evolved Gradually as Plans Take On Increased Investment Risk (August 2010), available at http://www.gao.gov/new.items/d10754.pdf . 106 CalPERS. (2008). Refund Rollover Election, available a https://www.calpers.ca.gov/mss-publication/pdf/xtA7O21Bave73_refund_rollover_election.pdft 107 CalPERS Toolkit at 15; SACRS Glossary at 288. 108 See CalPERS (2008). Refund Tax Information, available at https://www.calpers.ca.gov/mss-publication/pdf/xtA7O21Bave73_refund_rollover_election.pdf . 109 Kern v. Long Beach, 29 Cal. 2d 848 (1947) and Allen v. City of Long Beach, 45 Cal. 2d128 (1955). 110 Packer v. Board of Retirement, 35 Cal. 2d 212 (1950). 111 CalPERS. (July 2011). Vested Rights of CalPERS Members: Protecting the pension promises made to the public employees, available at http://www.calpers.ca.gov/eip-docs/about/press/news/vested-rights.pdf.